Exxon Mobil: Should You Invest?XOM) announced second quarter ended June 30, 2016 net income of $1.7 billion or $0.41 per diluted share, down 60 percent year-over-year from $4.2 billion or $1.00 per diluted share during the same period last year.
Exxon Mobil has witnessed continued sequential and year-over-year decline in its bottom line primarily due to weaker downstream and upstream results. The sequential decline in second quarter earnings with robust upstream results somewhat offset by weaker chemical and downstream earnings coupled with greater corporate expenditures.
The key energy company reported continued sequential and year-over-year weakness in the earnings for the quarter as a result of the ongoing weaker global commodity demand and pricing environment coupled with the expanding exploration spending.
Increasing demand is good news
The global macroeconomic conditions remained mixed for the second quarter of 2016 with improved U.S. development, somewhat stabilizing economic environment of China, weaker growth in Japan and Europe, improvement in global crude oil prices partially offset by decline in natural gas pricing, modest improvement in international refining margins while weakening of chemical product margins.
Further, the international energy demand is forecasted to expand by 25 percent as of 2040 with natural gas and oil estimated to seize a total 60 percent of the overall energy market by 2040 and natural gas chiefly substituting the projected demand decline for coal.
The global energy pricing is expected to still not have reached its floor for the decline and it’s believed to continue to hurt the margins of all the major energy exploration, mining and refining companies while delivering negative shareholder returns.
Positives to note
Exxon Mobil believes oil to be the world’s key fuel till 2040, growing 25 percent from 2014 till 2040 and being vital to chemicals production and transportation demand. Further, natural gas is believed to grow the highest (56 percent) when considering coal being the second highest demanded fuel. Renewable sources of energy and nuclear fuel are believed to expand all through the fiscal year 2040 with biomass and nuclear each having about 8 percent market share as of 2040.
Other renewable fuel sources are expected to have 4 percent share and hydro having 3 percent market share. Oil demand is expected to grow at an average yearly growth rate of 0.7% and all other fuel types average annual growth rate is estimated at 0.9% between 2014 till 2040.
Going forward, Exxon Mobil estimates that 85 percent growth in electricity demand from 2014 till 2040 is estimated to be recorded from non-OECD nations with China leading the electricity demand expansion and leveraging a fourth of the global electricity as of 2040. The electricity use in India is estimated to grow 185 percent for the period while the US share of worldwide electricity consumption demand is believed to fall from nearly 20 percent during 2014 to about 15 percent during 2040.
The consistently growing global electricity demand across the globe with oil becoming the major source of energy over the longer term is projected to push the upstream companies including Exxon Mobil to continue to expand their worldwide oil production while ramping their downstream operations to increasingly refine and deliver more of oil.
Overall, the investors are advised to “Hold” their position in Exxon Mobil Corporation considering the company’s significant long-term growth prospects but, currently weaker financial position with notable total debt of $44.47 billion against weaker total cash position of $4.36 billion only, restricting the company to make future growth investments. However, the profit margin of 5.13% seems satisfactory while the PEG ratio of 1.92 depicts solid company growth.
Published on Aug 11, 2016By Vinay Singh